Unlike the subrogation clause analyzed in the Walker decision, the second part of the 1995-2006 SPD subrogation provision does not state in unambiguous terms what “the right to recover from the covered persons” encompasses; it uses no modifying terms such as “all,” “first lien,” “any recovery,” or “100% reimbursement.”

Because the 1995-2006 SPD does not unambiguously establish the Plan’s right to 100% reimbursement, the Third Circuit’s precedent in Bollman and Ryan warrants the application of federal common law to determine the propriety of apportioning attorney’s fees. See Wal-Mart Stores v. Bond, No. 96-7522, 1997 U.S. Dist. LEXIS 8058, at *9 (E.D. Pa. June 3, 1997).

Here is a recent district court opinion out of the Third Circuit that applies the common fund doctrine where the summary plan description did not explicitly address whether the plan’s recovery would be burdened with a pro rate share of attorneys’ fees. The opinion has several interesting aspects in addition to the plan language issues.

The facts are those of a typical plan recovery case.

Keith Beenick (“Beenick” or “Decedent”) was a participant in the Fund. When Decedent suffered injuries allegedly as a result of medical malpractice by a third-party, the Fund paid benefits on Decedent’s behalf, in accord with the SPD in effect at the time (“1995-2006 SPD”).

. . .

Subsequent to the death of Decedent, the Trustees adopted an updated version of the Plan’s summary plan description (“2007 SPD”), which became effective on January 1, 2007. The 2007 SPD contains a section entitled “In the Case of Subrogation (Reimbursement).

The parties could not agree on the reimbursement and the plan filed suit.

The parties left the court to address the issue solely in terms of the summary plan description:

The Trust Agreement itself is silent on the issue of subrogation, and neither party has furnished the Court with a copy of the Plan, nor has any party presented to the Court the Plan’s language regarding the issue of subrogation. Instead, the Fund relied on the subrogation language as it appears in versions of the SPD. Since the parties assert their rights pursuant to the language in the SPD, this Court will substitute the SPD for the Plan throughout this opinion.

Issue #2 – Amendment Of The SPD

The fund amended the summary plan description after the participant’s death to bolster its claims.

Plaintiff concedes that the 1995-2006 SPD was in effect at the time of Decedent’s death and describes the 2007 SPD as providing “significant explanation with respect to the Fund’s right to reimbursement/subrogation.”

Further, the court took the act of amendment as an admission of ambiguity.

Plaintiff concedes that “[t]he current [2007] SPD expanded the Fund’s subrogation rights” to disclaim the make-whole doctrine. By implication, whether by stating that the 2007 SPD expands or explains the 1995-2006 SPD, Plaintiff is effectively admitting that the language of the 1995-2006 SPD is open to interpretation, and thus, ambiguous; and as a result, Plaintiff has updated the language of its 2007 SPD to include language that has been deemed unambiguous in Third Circuit case law.

The court refused to take the amendment into account:

In so doing, the Fund has explained and expanded the rights it has under the Plan. Id. However, this Court need not rely on the Fund’s newly minted SPD language to ascertain whether it has allowed and indeed, broadened the Fund’s right of subrogation, but rather look to the language contained in the four corners of the 1995-2006 SPD to determine whether it is unambiguous.

Issue #3 – Failure To Address Attorneys’ Fees

The argument made by the participant’s estate did not impress the court which found the reasoning “short and confused”. The ambiguity in the SPD, however, turned the court’s attention to federal common law, including equitable defenses. The court found it an appropriate case for application of the common fund doctrine.

the second part of the 1995-2006 SPD subrogation provision does not state in unambiguous terms what “the right to recover from the covered persons” encompasses; it uses no modifying terms such as “all,” “first lien,” “any recovery,” or “100% reimbursement.”

Because the 1995-2006 SPD does not unambiguously establish the Plan’s right to 100% reimbursement, the Third Circuit’s precedent in Bollman and Ryan warrants the application of federal common law to determine the propriety of apportioning attorney’s fees. See Wal-Mart Stores v. Bond, No. 96-7522, 1997 U.S. Dist. LEXIS 8058, at *9 (E.D. Pa. June 3, 1997).

Issue # 4 – Liability Of Parents

While the estate was adjudged liable for reimbursement of the plan, subject to a reduction for attorneys’ fees, the decedent’s parents were relieved of any liability.

Defendant contends that, regardless of this Court’s decision to grant or deny Plaintiff an equitable lien on any recovery Defendant receives from the third-party action — such lien could only apply to the Estate and not to any recovery by Parents because Parents were not “Covered Persons” under the terms of the contract, were not in privity with Plaintiff, and received no benefits from Plaintiff. (Def. Br. 7); see Bill Gray Enters. v. Gourley, 248 F.3d 206 (3d Cir. 2001). Plaintiff asserts that its Complaint only implicates the parents of Keith Beenick in their capacities as Executor/Executrix of Defendant, the Estate of Beenick.

As in Bill Gray, “a plain reading of the Plan document does not permit the Plan to seek reimbursement from a party for whom it never expended funds under its medical coverage.” 248 F.3d at 221. As such, any recovery achieved by Decedent’s Parents separate from the Estate of Keith Beenick for their own claim of loss of companionship or other equitable relief, is not subject to an equitable lien by Plaintiff.

Note: The fund was a multi-employer plan which enjoys full ERISA preemption privileges, so the case is relevant to issues arising in any self-funded ERISA plan subrogation case.

Defendant, relying on a footnote in Sereboff, 5 argues that a full reimbursement to Plaintiff without a pro-rata reduction for attorney’s fees for the creation of the settlement fund is not “appropriate” within the meaning of § 502 (a)(3)(B) of ERISA because it would result in Plaintiff’s unjust enrichment. 6 See Sereboff, 547 U.S. at 368 n. 2. Defendant suggests that the application of a doctrine of federal common law is appropriate and devotes most of its short brief to defining legal terms and raising rhetorical questions about justice rather than engaging in the analysis necessary to determine whether application of federal common law is appropriate — an analysis necessary to determining whether to grant the pro-rata reduction per Defendant’s request.

In that footnote, the Supreme Court noted that the plan beneficiaries’ argument that, “even if the relief [] sought [by the fund claiming a subrogation lien] was ‘equitable’ under § 502(a)(3), it was not ‘appropriate’ under that provision in that it contravened principles like the make-whole doctrine.” Sereboff, 547 U.S. at 368 n. 2. However, the Court declined to consider whether the lien was “not ‘appropriate’ apart from the contention that it was not ‘equitable’” because this issue was not raised in the courts below. Consequently, the Court declined to consider the appropriateness of various equitable defenses. Id.

On the other hand, Defendant here has raised equitable defenses, and as such — where not precluded by the express terms of the plan — they will be considered. See Fotta v. Trustees of the UMW Health & Ret. Fund of 1974, 165 F.3d 209, 214 (3d Cir. 1998) (“Because the remedy we recognize here is equitable in nature, its award involves an exercise of judicial discretion. And, like other equitable remedies, it is subject to equitable defenses.”).

Observe here, however, that the plan language was found to be ambigous – this is not a case where the common fund doctrine was applied where the plan language disclaimed responsibility for attorneys’ fees.

Liability of Heirs - The court correctly ruled that the parents could not be held liable under ERISA Section 502(a)(3).